Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services fo

Question

Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the cash flow analysis, Aardvark should

purchase Zebra only if Aardvark's cost of capital is above 10%.
not purchase Zebra Computer Services.
purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
purchase Zebra Computer Services.

Please explain the logic/math behind the chosen answer. Thanks!

Explanation / Answer

Aardvark Software, Inc. can purchase all the stock of Zebra Computer Services for $1,200,000 in cash. Zebra is expected to generate net after-tax cash flows of $100,000 per year for each of the next 12 years. Based solely on the cash flow analysis, Aardvark should

purchase Zebra only if Aardvark's cost of capital is above 10%.
not purchase Zebra Computer Services.
purchase Zebra only if Aardvark's cost of capital is between 5% and 10%.
purchase Zebra Computer Services.

basing on cash flow analysis, Aardvark should not purchase Zebra Computer Services.

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